It has been a volatile week in the markets, particularly for bank stocks, following the collapse of Silicon Valley Bank (a subsidiary of SVB Financial) and Signature Bank. For many investors, it brings into focus the importance of finding stable companies with a history of long-term outperformance in any market.
The past five years have certainly been extremely volatile, and when you look back, only a relative few financial stocks have been able to maintain at least 15% annual earnings-per-share (EPS) growth over that period. Three of the largest and most stable are Visa (V -0.48%), Mastercard (MA -1.19%), and MSCI (MSCI -1.19%). Can these top performers continue to increase profits over the next five years?
A turbulent five years
The volatility started in 2018, when the S&P 500 dropped 6.2% for the year amid the China trade war, among other factors. In 2020, the pandemic hit and caused stocks to plunge. The short bear market was followed by a two-year bull run led by technology stocks, with prices soaring to the highest level since the run-up to the dot-com crash of the early 2000s. Last year, valuations contracted and we had the worst retreat since the Great Recession, with the S&P 500 falling 19% and the Nasdaq Composite losing one-third of its value.
Now, in 2023, we have high inflation, soaring interest rates, and the potential for a recession, which -- along with the excesses of tech and crypto markets -- contributed to the biggest bank failures in more than a decade.
Over the past five years, the S&P 500 has an average annual return of 7% as of March 15. Meanwhile, all three of these stocks -- Visa, Mastercard, and MSCI -- have outperformed the benchmark. On an annualized basis, Mastercard has returned 13.9% per year, Visa has returned 11.9% annually, and MSCI has gained 29.2% per year over that same period.
The gains have been driven by the earnings consistency of these companies. For the five years ended Dec. 31., Visa posted annual earnings per share (EPS) growth of 18.6%, while Mastercard has seen EPS growth of 22.9% per year, while MSCI has posted annual EPS growth of 26.5% in that span.
Why they can continue to grow profits
Two of these businesses -- Visa and Mastercard -- are payment processors, while MSCI is a company that runs the MSCI family of securities indexes. The common thread that runs through all of them is the fact that not only are they dominant players in their industries, but they also have their earnings power protected by wide moats.
Visa and Mastercard are the two largest credit payments processors and dominate the market with their massive networks. There are only two other competitors -- American Express and Discover Financial -- and they both operate their own closed-loop networks.
Neither Visa or Mastercard has to worry about credit risk, because they are not lenders; they simply generate profit by taking fees on every transaction that crosses their networks. Likewise, MSCI is one of just a handful of index providers in an industry where there is a very high bar for entry and little opportunity for new players to challenge the long-established leaders.
All three of these companies are projected to have double-digit percentage EPS growth over the next five years, based on their competitive advantages and efficient, low-overhead business models, which generate huge margins.
Also, they have each shown the ability to outperform in difficult markets -- like the one we are in now -- as well as bull markets.
Of these three growth stocks, the biggest concern is MSCI's valuation, which is high at a price-to-earnings ratio of about 50. Although that's worth monitoring, MSCI's earnings power remains strong. Visa and Mastercard are more attractively valued and look like solid buys.
